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Contingent Liability Insurance

Contingent liability insurance plays a crucial role in managing and mitigating the risks in M&A transactions and active litigation scenarios.
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Contingent risk insurance enables the transfer of risk around known legal and regulatory exposures to insurers. This valuable tool provides litigants and other stakeholders with greater certainty around legal outcomes in pending or expected proceedings by setting a floor on recoveries for plaintiffs or a ceiling on exposure for defendants. 

Contingent risk insurance has grown substantially in recent years. Initially used in the merger and acquisition (M&A) context to address known risks that could derail a transaction or expose the parties to future losses, contingent risk insurance is now commonly used as a stand-alone solution, independent of any transaction. With coverage in place, the insured is able to secure financing on better terms, attract investors, and reduce balance sheet uncertainty.

At Marsh, our experienced team of transactional risk professionals can help you design a customized contingent risk policy that protects against a variety of scenarios and provides greater predictability around potential exposures.

Navigating the complex M&A landscape

Buyers and sellers in M&A transactions often have different perspectives on the potential impact of identified risks associated with the target company. This divergence can lead to challenging negotiations when allocating potential liabilities. Contingent risk insurance can ease these negotiations by helping the buyer to avoid inheriting a liability and the seller to avoid retaining it. In the event a potential liability materializes, coverage is designed to respond and reduce the financial impact on the insured. This type of insurance is particularly useful when potential liabilities pose obstacles to completing an M&A transaction.

Beyond M&A

Contingent risk policies can also provide valuable coverage for uncertainties that hinder a company's ability to obtain financing or deploy its own capital. These policies allow for the transfer of risks that may result in one party bearing greater exposure to a legal risk than they are comfortable with. Often, contingent risk policies cover risks that have a low probability of occurring but carry high severity if they do.

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Core contingent risk solutions

Marsh offers a range of core contingent risk solutions to address various scenarios:

  • Judgment preservation insurance (JPI): JPI helps mitigate the risk of a trial court judgment or an arbitral award being overturned or reduced on appeal, annulment, or in other proceedings. It allows plaintiffs to "lock in" some or all of their damages pending appeal and helps defendants protect against the risk of paying damages upon remand or facing increased damages after appeal.
  • Adverse judgment insurance (AJI): AJI reduces the potential impact of catastrophic or very large judgments or awards against the insured. AJI is designed for commercial litigation and can help to ease concerns in M&A transactions.
  • Work-in-progress (WIP) or portfolio insurance: This coverage is designed for law firms acting on contingency. It helps to manage the firm's risk exposure and covers high fixed costs across individual cases or a portfolio of cases at different stages. Coverage is available for up to 90% of fees and 100% of costs invested into the portfolio of cases and may include a time trigger wherein the policy responds if the cases have not resolved within a defined number of years.
  • Insurance-backed monetization or premium finance: This solution allows litigants, law firms, and other stakeholders to secure upfront financing backed by the policy at a better cost of capital than they would obtain without insurance. The capital can be used to cover the cost of the premium and related expenses or bring forward proceeds while awaiting case resolution or an insurance payout.

Example use cases

The following scenarios illustrate the potential benefits of contingent risk insurance:

  • Judgment preservation for plaintiff: A company wins an US$80 million judgment in a lawsuit it brought alleging intellectual property infringement against a competitor. The defendant appeals, with the appellate process expect to unfold over several years. The plaintiff obtains a US$40 million contingent risk policy to mitigate against the risk that the award is disrupted on appeal. Using the insurance policy as collateral, the company is able to secure a US$20 million loan to finance the premium and bring case proceeds forward to fund current operations.
  • Judgment preservation for defendant: A defendant company is sued for breach of contract, with US$30 million in damages sought. Although the court rules in favor of the defendant, the plaintiff appeals. The defendant purchases a contingent risk policy to protect against the risk of reversal on appeal.
  • Adverse judgment insurance for defendant: The target of an M&A transaction is defending against an antitrust lawsuit seeking US$80 million in damages. To mitigate the risk of a large award, the company purchases a contingent risk policy with a retention of US$10 million. With coverage in place, the company can confidently reject a US$40 million settlement demand and increase the probability of a successful transaction.
  • WIP portfolio insurance for law firm: A newly formed law firm wants to take on more contingency fee cases but is concerned about unpredictable cash flows. The firm procures a WIP policy covering a portfolio of three contingency fee cases with a US$20 million cover limit, which provides that if the firm has not received US$20 million in cash proceeds at the time the last case resolves or within five years, the policy will respond. Following the purchase of the policy, the firm is able to secure insurance-backed financing to finance the premium and support its work on cases.
  • Protection from successor liability: A company plans to purchase a competitor's assets but is concerned about potential claims based on successor liability arising out of a pending arbitration the competitor is defending. The company purchases a contingent risk policy to mitigate the potential impact the company may face from a finding of liability against the competitor.
  • Coverage to enable release of funds held back in an acquisition: A company that was acquired three years ago is seeking distribution of $35m in funds held back pursuant to an asset purchase agreement because of the possibility of a third-party claim against the acquired company. The acquired company procures a contingent policy on the basis that the third-party is unlikely to assert claims, but even if it does, such claims would be both meritless and barred by the applicable statute of limitations, allowing distribution of the $35m holdback.

In addition to the core contingent risk solutions, Marsh offers other risk solutions to address specific needs:

  • Arbitration award default insurance: Protects against losses arising from non-payment of an enforceable arbitral award against a respondent under investment treaties or commercial contracts.
  • Class action settlement and "buy-out" insurance: Allows defendants to transfer settlement and adverse judgment risk of existing class actions, including consumer class actions, before or after settlement.
  • Successor liability and fraudulent conveyance insurance: Reduces post-closing risks related to successor liability and fraudulent conveyance in M&A transactions, in lieu of indefinite escrow or indemnity requirements.

The following hypothetical examples demonstrate how litigants, law firms and other stakeholders can benefit from contingent risk insurance.

Judgment preservation for plaintiff with insurance-backed monetization: A company wins an US$80 million judgment in a lawsuit for intellectual property infringement. The competitor appeals, and the resolution will take years. To protect against a reversal of the judgment, the plaintiff obtains a US$60 million contingent risk policy. They finance the premium and fund current operations with a US$30 million loan, using the insurance policy as collateral. This allows the company to monetize the judgment despite the ongoing appeal.

Judgment preservation for defendant: A defendant company is sued for breach of contract, with US$30 million in damages claimed. Although the court rules in favor of the defendant, the plaintiff appeals. To address investor concerns about a potential reversal, the defendant purchases a contingent risk policy. This coverage eases investor concerns and enables the company to raise funds without the threat of a reversal on appeal.

Adverse judgment insurance for defendant in an M&A transaction: The target of an M&A transaction is facing an US$80 million antitrust lawsuit. To mitigate the risk of a large damages award, the company obtains a contingent risk policy. The insurer determines that even if the company is found liable, the plaintiff is unlikely to obtain more than US$10 million in damages. With the policy in place, the company can reject a US$40 million settlement offer and negotiate from a stronger position. It can also remove a hurdle to the transaction, making itself more attractive to potential buyers.

WIP portfolio insurance for law firm: A newly formed law firm wants to take on more contingency fee cases but is concerned about unpredictable cash flows. The firm procures WIP coverage for a portfolio of three contingency fee cases with a US$20 million cover limit, which provides that if the firm has not received US$20 million in cash proceeds at the time the last case resolves or within five years, the policy will respond. The firm also secures insurance-backed financing on a non-recourse basis, repaid from either case proceeds or an insurance payout.

Protection from successor liability: A company plans to purchase a competitor's assets but is concerned about potential claims based on successor liability arising out of a pending arbitration the competitor is facing. To protect against this contingency, the company purchases a contingent risk policy to minimize the impact of any liability that could arise from an adverse finding.

Why choose Marsh?

Marsh’s dedicated contingent risk team has extensive experience in complex litigation and M&A transactions and a deep understanding of the insurance market. As the largest broker in the world, we have strong relationships with a number of A-rated insurers, allowing us to deliver the attractive terms and coverage options. We prioritize your needs and work closely with your counsel and deal team to efficiently execute risk solutions that provide greater certainty and improve deal outcomes. With Marsh, you can expect timely execution, tailored coverage, and a focus on your specific requirements. Contact your Marsh representative to learn more about how we can assist you with your contingent risk insurance needs.

FAQs

Risks that involve legal, as opposed to factual, uncertainties and risks in which potential damages can be quantified.

Contingent risk insurance offers a variety of limits ranging from millions to upward of US$1 billion. Marsh works with a number of A-rated insurers, providing a wide range of options for your specific risk.

The process typically takes between four to 12 weeks from submission to insurers, depending on the complexity of the risk. Smaller risks can be bound more quickly, while larger and more complex risks may require additional time for due diligence and policy negotiation.

The cost of coverage depends on various factors, such as the complexity of the risk and magnitude of the exposure. Premiums are a percentage of the policy limit and typically are paid upfront. If the insurer engages outside counsel to evaluate the risk, it may charge an underwriting fee and certain taxes may be due to the jurisdiction where the insured is domiciled. Coverage remains in place for the duration of the case but can be tailored for risks with finite periods or portfolios of cases. Contingent risk policies do not cover legal fees or costs, settlement outcomes (except for law firm WIP and litigation buy-out policies), or collection and enforcement risk (except for arbitration award default insurance). The insured retains decision-making power, including over settlement.

Contingent risk policies typically have deductibles that must be satisfied before the policy responds. The deductible amount is determined based on the unique circumstances of the risk being insured and helps align the interests of the insured and insurer.